Total is buying Maersk’s oil and gas business in a $7.45bn deal which the French energy giant said would strengthen its operations in the North Sea and raise its output to 3mn barrels per day by 2019.
For A.P. Moller Maersk, the sale of Maersk Oil, with reserves equivalent to around 1bn barrels of oil, fits with the Danish company’s strategy of focussing on its core business of shipping and other activities announced last year.
This latest mega merger move is representative of the tide of mergers and acquisitions (M&A) that has swept the global energy market, since the onset of the prevailing downturn in late 2014. Oil and gas companies and stakeholders, both big and small, across the world have been ardently adopting a variety of operational excellence measures in an era of low oil prices, and M&A has been central to that subsistence strategy.
Expected to be completed in the first quarter of 2018, the deal could see some job cuts particularly in Britain where there are overlaps, Total told Reuters, adding that it could make additional cost savings of about $200mn per year.
Under the terms of the agreement, A.P. Moller Maersk will get $4.95bn in Total’s shares and Total will assume $2.5bn of Maersk Oil’s debt. Maersk has said it plans to return a ‘material portion of the value of the received Total S.A. shares’ to shareholders in 2018 and 2019 in the form of extraordinary dividend, share buyback or distribution of shares in Total.
Total expects its biggest deal, since it acquired Elf in 2000, to generate financial synergies of more than $400mn per year, in particular by combining assets in the North Sea. It also said the acquisition would boost earnings and cash flow.
“The combination of Maersk Oil’s North Western Europe businesses with our existing portfolio will position Total as the second operator in the North Sea with strong production profiles in UK, Norway and Denmark, thus increasing exposure to conventional assets in OECD countries,” Total’s chief executive and chairman Patrick Pouyanné has said of the acquisition.
“Internationally, in the US Gulf of Mexico, Algeria, East Africa, Kazakhstan and Angola there is an excellent fit between Total and Maersk Oil’s businesses allowing for value accretion through commercial, operating and financial synergies,” Pouyanné was quoted as saying in the press release received by arabianoilandgas.com.
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Total has been betting on new rather than mature fields in the North Sea and the acquisition gives it further economies of scale by making it the second largest player in the region with production of about 500,000 barrels of oil equivalent per day (boepd).
The Danish oil company has access to high-quality fields in the Norwegian and UK North Sea, which Pouyanne said would help boosts Total’s output to 3mn boe as soon as 2019 from 2.5mn boe now.
According to Total’s media statement, the combination with Maersk Oil offers the French major ‘an exceptional overlap of upstream businesses globally which will enhance Total’s competitiveness and value in many core areas, in particular through some high quality growing assets and through the delivery of synergies’.
As per the news release, the transaction will specifically bring the following benefits to Total:
- Around 1bn boe of 2P/2C reserves, 85% of which are in OECD countries (more than 80% in the North Sea), contributing to Total’s continuous balancing of country risks of its portfolio to enhance shareholder value
- The addition of 160,000 boepd of mainly liquids production in 2018, acquired at an average price of $46/boepd, offering high margins with an estimated free cash flow break-even of less than $30 per barrel and growing to more than 200,000 boepd by the early 2020’s further strengthening Total’s leading production growth outlook
- Total expects to generate operational, commercial and financial synergies of more than $400mn per year, in particular by the combination of assets of Total and Maersk Oil in North Sea, an area of excellence for both companies
- The transaction is immediately accretive to both earnings and cash flow per share underpinning Total’s dividend profile.
The move illustrates Total’s strategy of using a strong balance sheet to acquire attractive assets from struggling competitors having emerged from the prolonged oil downturn stronger than some of its rivals.
“It was time for us to do what a real oil and gas company would do in a period such as this when prices are lower and costs are down. Either launch new projects or acquire new reserves at attractive prices,” Pouyanné told Reuters.
Pouyanné has also revealed that Total had proposed a deal to Maersk as an alternative to floating the business.
“There was a debate within Maersk and they finally accepted given that it was attractive and also the fact that an IPO in a tense oil market would not be a right move,” he said, adding that no other oil major was bidding for the assets.
